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July 7, 2010    

BoE expected to keep interest rates on hold tomorrow

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by Kay Murchie

The Bank of England’s Monetary Policy Committee (MPC) is tomorrow expected to keep UK interest rates on hold at the historically low level of 0.5% for the 17th consecutive month.

Furthermore, all members of the MPC are expected to keep the quantitative easing programme (QE) on hold.

QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital.

Interest rates have stood at the record low since March 2009, when the Bank also embarked on its QE programme. At the time, the economy was in the midst of its worst recession in more than five decades.

However, at last month’s meeting, policymaker Andrew Sentance voted for rates to rise to 0.75% from their current historic low of 0.5%.

Mr Sentance’s view to lift rates comes as inflation fell in May but still remains well above its target of 2%, and suggests the MPC is becoming nervous about stubborn inflation.

Consumer Price Index (CPI) fell to 3.4% in May from a 17-month high of 3.7% in April, according to the latest figures from the Office for National Statistics.

Economist Howard Archer of IHS Global Insight comments: “The risks to a still-fragile UK recovery coming from the intensified tightening of fiscal policy that will increasingly kick in … mean that most members of the MPC are likely to maintain the view that it is premature to raise interest rates despite persistently above-target and sticky consumer price inflation.”

In the meantime, it was announced this week that Martin Weale will join the MPC in time for the August meeting.

Mr Weale replaces Kate Barker after her term ended on 31 May.

Mr Weale is one of four external members appointed by the Government and for the past decade and a half has been in charge of the National Institute of Economic and Social Research (NIESR) – an influential think tank which provides regular updates on economic trends.

As was the case at the June meeting, the MPC will comprise just eight members instead of the usual nine.

The Bank of England will announce its decision at 12.00pm tomorrow.

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